Discuss about the Microeconomic Analysis for Crude Oil Prices.
Primarily, oil is considered among the top energy consumption source in the global economy alongside gas. The expansion of the global economy dwells on crude oil consumption (Kar & Pathak, 2017).The global economy thrives on energy consumption, mainly oil and gas. There is a direct impact of global oil prices on the welfare of economies and consumers. There are various reasons for the fluctuation of oil prices such ad demand and supply of crude oil factors, exchange rate outcomes, market forces such as cartel behavior among others. Owing to the growing crude oil prices in the world this has created the need for governments to intervene in order to protect consumers. The need for government regulations has arisen from the need to control the crude oil fluctuations.
The exchange process in the global crude oil economy has made various industry changes. The global crude economy changes based on the exchange outcomes. Specifically, the dollar appreciation and depreciation, negatively and positively impacts on the global oil economy (Obstefeld, Milesi –Ferretti & Arezki, 2017).Primarily, the dollar is the major exchange mode of exchange for the global market economy. For oil producers oil revenue is exchange in dollars thus making the oil prices to be affected by its appreciation and depreciation. Particularly, market forces such as cartels directly impact the prices of oil prices .Noteworthy, the OPEC group plays an important role in determination of global crude oil prices (Trefis Team, 2017).The implementation of a reduced production by the OPEC countries greatly impacted the crude oil prices in Nov 2016.
Noteworthy, WTI oil prices rose above 9 percent following a directive to reduce output by the OPEC. However, the power of the OPEC countries regarding crude oil output seems slight rather than conclusive. Specifically, OPEC seeks to achieve an equilibrium outcome in the oil prices. Ideally, at equilibrium, demand for crude oil is met with adequate supply. However, it is not easy to achieve equilibrium outcomes due to the constant micro and macroeconomic factors at the global level. There is bound to be an increase in the global crude oil demand due to the economic activities in China, India among other markets whose supply will be managed by the OPEC .The OPEC seeks to achieve equilibrium outcome though its continuous revision of global demand forecasts. OPEC anticipated an equilibrium outcome in the global crude oil demand and supply patterns in the year 2017.
Source: Data energy Information Administration
Trefis Team. (2017).OPEC‘s influence on Oil Prices Waning. Forbes.
Predominantly, the supply of any product or services has an impact on the price outcome. The same can be said for the oil market prices. The supply of crude oil directly impacts on the oil prices (Sheppard, 2017).Demand and supply theories as to outcome prices has been evident in the recent oil prices. The reduced production of crude oil by the OPEC since December 2016, has limited the supply of crude oil which has increased the demand which in turn has caused the high prices .In addition, political and financial instabilities are likely to adversely impact on the supply of crude oil .Usually, business thrives on the peace which is heavily dependent on political stability. For Venezuela, its recent political and financial instabilities has greatly reduced its crude oil production. Owing to the fact that Venezuela is an important member of the OPEC thus its importance of its crude oil production to the world prices.
Sheppard, D. (2017, Dec 13).Five main drivers of oil prices in the coming year. Financial Times
Primarily, the demand and supply economic concepts directly impact the crude oil prices. Essentially, with an increase in the demand for crude oil owing to the fact that most of the economy thrives on crude oil as a very important resource. Owing to the reduced supply of crude oil by the OPEC countries who are the major global crude oil providers, the price of crude oil rises. However, in the vent that there is reduced demand of crude oil alongside an increased production of crude oil, the crude prices will be lower(Kosakowski,2018).Demand and supply concepts apply to all types of commodities thus making oil not an exception to the persuasive whims of demand and supply curves. The demand for global oil is fueled by the emerging and expanding crude oil markets in the world. With economic growth of global markets so does the demand for crude oil hence the crude oil price fluctuations.
Categorically, there was a crude oil price reduction between the 2014 and 2015.The drop in oil prices was attributed to reduced demand from emerging markets and less investment in other commodities. Specifically, the 2014-2015 oil price decline is considered the third biggest decline in over 30 years. The price decline is attributed to the supply, demand, policy objectives of the OPEC and political risks. Majorly, OPEC produces approximately, thirty percent of the world crude oil making its policies have an effect on the demand and supply of crude oil to the economy thereby influencing the price of oil (Baffles et.al, 2015).The fact that global economy is growing implies an increase in the demand for energy consumption thus a fluctuation on the oil prices. In addition, monetary and fiscal policies of large economic blocs directly impact capital flow, investment and oil demand thereby influencing the price fluctuations in crude oil (Kar & Pathak, 2017).
Currency valuation has the effect of fluctuating oil prices. Noteworthy, the dollar (USD) appreciation directly impacts on the global oil price (Tarver, 2015).The Unites States dollar appreciation in the year 2015 caused a rise in the global crude oil prices. However, the appreciation of the dollar impacts directly on the commodity prices. The fact that most global commodities such as oil are exchanged under the dollar implies that the value of oil depends on the appreciation and the depreciation of the dollar. A stronger dollar means a fall in the price of crude oil which is good is not good for producers of crude oil. Alongside dollar value fluctuations, lower demand for crude oil, oversupply of crude oil and cartel forces, the prices of crude oil depends on these factors. In the case of an overflow in the supply of crude oil inspires a price decline for crude oil. Price fluctuations are dependent on the demand, supply and market forces concepts.
Usually, consumer welfare is partly affected by exchange outcomes of the global economy. Primarily, consumers in countries whereby there is no dollar appreciation are likely to purchase the crude oil at higher prices as compared to those countries with dollar appreciation rates. Usually, dollar depreciation exchange rates negatively affect the supply and demand for oil (Alhajji, 2017).The difference of the dollar valuation in different countries creates a difference in the economic activity and economic livelihoods in the respective countries. Exchange rates have created disparities in the balance of accounts of various economies (Sanchez, 2011).For countries using the dollar as their foreign exchange mode, in the case of appreciation of the dollar, there is lower consumer welfare and livelihoods because consumers will have to pay higher for the same barrel of oil.
However, for countries not affected by the dollar appreciation and depreciation, their economic livelihood and social welfare is likely to be unaffected by the dollar exchange outcome. Higher oil prices directly impact on social and economic welfare of companies and consumers (Joets & Razafindrabe, 2015).
Undoubtedly, the high crude oil prices trend hasn’t gone unnoticed by most countries. This high cost of crude oil has created a huge financial burden on the consumers which has necessitating the need for government intervention in different countries. Regulation of oil prices has been implemented into various jurisdictions to curb the high oil prices. The introduction of a dynamic fuel pricing system is being used to keep the oil prices in check for the better consumer outcomes (FE Online, 2017).The decline in the oil prices has been attributed to the slowing growth of emerging markets (Rogoff, 2016).The growth of emerging markets is fueled by the demand for commodity prices, to which oil is a crucial commodity. Substantial subsidy reduction on crude oil consumption is also effective in fluctuating the commodity price of crude oil. In addition, reduced government investment in the crude oil industry is effective in regulating global oil prices.
Conclusion
Undoubtedly, the role of crude oil in the global economy cannot be ignored hence the concern on the price fluctuations of the commodity over the years. The high crude oil global prices has been attributed to demand and supply curves of crude prices, growth of new emerging markets, market forces such as cartels(OPEC),Exchange outcomes inspired by dollar appreciation and depreciation among other factors. Owing to the high crude oil prices, the welfare of consumers and economies have been unstable thus the need for government intervention to curb the high global crude oil prices. The principal government interventionist approach is through fiscal and monetary regulatory framework.
References
Alhajji, F.A. (2017).The Impact of Dollar devaluation on the world oil industry: Do Exchange rates matter? Retrieved from https://www.anasalhajji.com/publications/opec-and-the-oil-market/impact-dollar-devaluation-world-oil-industry-exchange-rates-matter
Baffles, J., Kose, A. K., Ohnsorge, F., & Stocker. (2015).The Great Plunge in Oil prices: Causes, Consequences, and Policy Response. Retrieved from https://pubdocs.worldbank.org/en/339801451407117632/PRN01Mar2015OilPrices.pdf
FE Online. (2017, Sep 13).Government Steps in to save people from Rising Fuel Bill; May check Petrol, diesel Prices. Financial Express. Retrieved from https://www.financialexpress.com/market/com
Joets, M & Razafindrabe, T. (2015).What is the welfare social cost of oil price? Retrieved from https://afse2015.sciencesconf.org/61785/document
Kar, K.S & Pathak, Y. (2017).The Impact on major oil-exporting countries in the Middle East. Retrieved fromhttps://pubdocs.worldbank.org/en/339801451407117632/PRN01Mar2015OilPrices.pdfwww.ogfj.com/articles/print/volume-14/issue-4/features/oil-price-fluctuations.html
Keselowski, P. (2018).What determines Oil prices. Retrieved from https://www.investopedia.com/articles/economics/08/determining-oil-prices.asp
Modities / government-steps-in-to-save-people-from-rising-fuel-bill-may-check-petrol-diesel-prices/853216
Obstfeld, M., Milessi-Ferretti. M.G & Arezki, R. (2017).Oil prices and the Global economy; It’s Complicated. Retrieved from https://blogs.imf.org/2016/03/24/oil-prices-and-the-global-economy-its-complicated/
Rogoff, K. (2016).What’s behind the drop in Oil Prices. Retrieved from https://www.weforum.org/agenda/2016/03/what-s-behind-the-drop-in-oil-prices/
Sanchez, V.M. (2011).Welfare effects of Rising Oil Prices In Oil-Importing developing countries. Retrieved from https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.1746-1049.2011.00137.x>
Sheppard, D. (2017, Dec 13).Five main drivers of oil prices in the coming year. Financial Times .Retrieved from https://www.ft.com/content/82223838-df54-11e7-a8a4-0a1e63a52f9c
Tarver, E. (2015).4 Reasons why the price of crude oil dropped. Investopedia. Retrieved from https://www.investopedia.com/articles/investing/102215/4-reasons-why-price-crude-oil-dropped.asp>.
Trefis Team. (2017).OPEC‘s influence on Oil Prices Waning. Forbes.Com. Retrieved from https://www.forbes.com/sites/greatspeculations/2017/06/02/opecs-influence-on-oil-prices-waning/Q
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